If you want to start a heated debate, bring up forced arbitration.
The Consumer Financial Protection Bureau just finalized a rule that bans banks and financial companies from inserting certain “forced arbitration” clauses in deposit account, credit card, auto loan, student loan, payday loan, and other financial contracts. Consumer advocates are cheering, and those in the financial industry are none too happy. Both sides anxiously wait the outcome of Congressional review. In 2007, Congress banned arbitration in certain loans to servicemembers and veterans, and in 2010 it banned arbitration in most mortgages.
Meanwhile, there’s a lot of reaction to the CFPB’s ban. Len Bernstein, a partner at Reed Smith LLP and chair of the firm’s Financial Services Regulatory Group, explains the significance. “If the rule survives Congressional review and repeal efforts, as well as any lawsuits lodged by industry, it will be easier for consumers to file a class action complaint against financial services companies and, perhaps, achieve a settlement. The law also mandates that certain arbitration information be made public. Consumers will likely gain more awareness of the benefits and risks of pursuing arbitration versus suing on a class action basis to resolve their grievance.”
The relief that consumers obtain in arbitration pales next to the billions in relief provided to tens of millions of consumers in class actions.
-Lauren Saunders, Associate Director of the National Consumer Law Center
What’s at stake for financial institutions? “They would probably need to devote more resources to the defense of class action complaints, which is expensive notwithstanding the merits. They will also be required to devote additional resources in order to provide certain reporting on arbitrations to the CFPB as required under the rule,” says Bernstein.
But consumer advocates see progress, “Once the rule goes into effect next year, consumers who are harmed by widespread violations of the law like Wells Fargo's fake account scandal, will get their day in court and be able to band together in a class action that can force the wrongdoer to repay all of its victims. A CFPB study found class action lawsuits returned $2.2 billion to 34 million consumers after attorneys’ fees and court costs. But as more and more companies add forced arbitration clauses with class action bans, without the CFPB it would be easier for companies to harm millions of people and get away with it,” says Lauren Saunders, associate director of the National Consumer Law Center.
She points out that forced arbitration clauses mostly keep people from getting any relief, as few have the time or resources to fight individual cases. “The relief that consumers obtain in arbitration pales next to the billions in relief provided to tens of millions of consumers in class actions. In the CFPB study, consumers obtained relief in only 76 cases totaling $400,000.”
But the banking industry has a different opinion. In a prepared statement, the American Bankers Association’s CEO and President Rob Nichols said, “We’re disappointed that the CFPB has chosen to put class action lawyers – rather than consumers – first with today’s final rule. Banks resolve the overwhelming majority of disputes quickly and amicably, long before they get to court or arbitration. The Bureau’s own study found that arbitration has significant benefits over litigation in general and class actions in particular. Arbitration is a convenient, efficient and fair method of resolving disputes at a fraction of the cost of expensive litigation, which helps keep costs down for all consumers.”
Consumers also fare better in arbitration [...] Consumers receive nothing at all in nearly nine out of 10 class action lawsuits.
-Rob Nichols, American Bankers Association’s CEO and President
Furthermore, “Consumers also fare better in arbitration – the Bureau’s study found that consumers receive $5,389 on average compared to $32.35 in litigation. Consumers receive nothing at all in nearly nine out of 10 class action lawsuits. Despite acknowledging these benefits in its own study, the Bureau has chosen to write a rule that would essentially eliminate arbitration – and force consumers into court – by requiring companies to face a flood of attorney-driven class action lawsuits from which consumers receive virtually nothing. Under this final rule, consumers lose. As Congress considers changes to the CFPB’s structure and accountability, we also urge lawmakers to overturn this rulemaking.”
Viveca Ware, group executive vice president, regulatory policy for the Independent Community Bankers of America, voiced her concerns, “The arbitration process was working well for consumers and financial institutions. When the rules go into effect, it will cost consumers and financial institutions. With arbitration, financial institutions bore the cost.”
Ware says that the final rule requires financial institutions provide certain customer information to the CFPB, like name and personally identifiable information. “It will be easier to identify individuals in the smaller markets that we serve,” says Ware who says this could open the door to misuse of people’s information.
The bottom line – this is far from the last word on forced arbitration. Linda Sherry, director of national priorities for Consumer Action says, “Of course we’ll be bracing for a fight to protect the rule from Congress. Already one member has started a CRA process to kill the ban.”